Monetary Developments under Reasonable Control

The introduction of the new currency in late 2002, which replaced 1000 old Afghani by 1 new Afghani with a superior quality and security feature, was a crucial step in the Afghan government’s efforts to establish monetary control. This aimed at eliminating dubious currencies issued by regional leaders. After a dramatic three-month changeover operation ending in early January 2003, Af15.6 billion new Afghanis had been issued, leading to the amount of currency circulation at over Af20 billion. Since the introduction and float of the new currency, DAB has aimed to limit exchange rate volatility and to keep the rate within a range under what might be termed a "lightly managed float". The low degree of financial integration and market development allows DAB to pursue this approach.

After sharp depreciation of the Afghani from Af45-48/$ to Afg70$ in early November 2002, it strengthened and eventually stabilized at about Af46 per U.S. dollar by January 2003. With slight fluctuations, the exchange rate appears to have stabilized around Af48-9 per US$ in FY2003/04. The Afghani has remained strong at the same level through the first quarter of 2004/05, reflecting by now a widespread acceptance of the new currency.

Price data are currently limited to consumer price index (CPI) in Kabul. The index increased by double digits in October-November 2002 mainly due to the depreciation of the afghani after the introduction of the new notes. However, the prices stabilized since. The Kabul CPI has increased by 9 percent in FY2003/04, down from 52 percent in FY2002/03. Inflation has been somewhat higher than expected during the first quarter of FY2004/05, reflecting primarily increases in rents and the prices of other non-tradable goods.¹²

Monetary policy has continued to be prudent, with an increasingly regular regime of foreign exchange auctions to retain control over currency in circulation and ensure low inflation and a relatively stable exchange rate. Currency in circulation is estimated to have grown by 20 percent in 2002/03 and 35 percent in 2003/04, respectively. The rate of monetary expansion varied widely from quarter to quarter, reflecting the volatility of money demand, seasonal factors, and the level of interventions by the central bank. DAB’s foreign exchange reserves reached an estimated $773 million at the end of FY2003/04, equivalent to three months of imports which is deemed broadly adequate given the government's commitment to a flexible exchange rate driven by market forces.¹³

Comment(s)

There are [0] comment(s) for this entry. Post a comment.